Friday 20 July 2018

Richard Curran: Ten years after the crash our recovery is fragile because of lessons that we still haven’t learned

The Central Bank is now a behemoth. It is enormous and is likely to get even bigger. Photo: Bloomberg
The Central Bank is now a behemoth. It is enormous and is likely to get even bigger. Photo: Bloomberg
Richard Curran

Richard Curran

It is June 2008. The liquidity crisis in British and American banking has been running for nearly 11 months. Irish bank stocks have taken a pounding. House prices have been falling for around 12 months.

The impact is being felt on the Irish Exchequer, which is heavily dependent on property-related taxes. The word ‘recession’ first appears in newspapers referring to Ireland’s overall economic slowdown.

On July 8 2008, then Finance Minister Brian Lenihan came forward with the first set of emergency spending cutbacks. He said the government would take €440m out of budget spending in the rest of 2008.

This was just the beginning. He would have to go further and deeper just three months later in October. It was the start of a process that would lead to a multibillion-euro Exchequer correction and an IMF bailout. On that day in early July, almost 10 years ago, Mr Lenihan said: “The Exchequer returns published by my Department last week confirm we are facing a shortfall of €3bn in tax revenue this year.

“Government expenditure is running at 11pc ahead of the same period for last year. And there are a number of spending pressures, due mainly to higher unemployment.”

Ten years on and looking at our Exchequer surpluses, our return to full employment and our so-called fiscal space of at least €800m for October’s budget, this all looks to be very much in the past.

Government spending growing at 11pc in 2008 was simply out of control. And it certainly isn’t in that territory now.

However, the former IMF mission director to Ireland, Ashoka Mody, warned at the weekend about how such a crisis could happen again – and he pointed firmly to our corporation tax receipts.

He believes Ireland will come under increased pressure to change how we tax corporations and this will ultimately lead to a slowdown in corporation tax receipts in the future. Rightly pointing to the fact that foreign direct investment drove our recovery in recent years, this would leave us very vulnerable and unable to bounce back in the same way.

Our corporation tax receipts have almost doubled in the last three years, to over €8bn in 2017. How dependent are we on them to fund our growing Exchequer spending? Last year they accounted for 16pc of tax receipts, the same percentage as in 2003.

Just 10 companies provide 37pc of them, accounting for 6pc of all tax receipts last year.

In 2017, after taking in around €1.9bn more than we spent running the country, we reported an Exchequer surplus. But when the cost of financing the national debt is taken into account, our underlying budget deficit was around €1.5bn.

We spent €2.1bn more on day-to-day costs running the country in 2017 than we did in 2016.

Without the extra €4bn in corporation tax that has steadily accrued in recent years, we would have had an underlying deficit of €5.5bn, if we went ahead and spent exactly the same amount of money running the country.

These receipts are far from guaranteed, as Mr Mody pointed out. Yet FDI has been the driver of our recovery. Other factors outside our control have help take the economy back to prosperity.

We had the collapse in oil prices in 2014 which has benefited businesses and consumers. We have record low interest rates care of the European Central Bank. We have also seen the cost of borrowing for the State fall sharply because of the impact quantitative easing is having on bond markets.

This has enabled Ireland to borrow more cheaply and refinance more expensive older debt.

We also have enjoyed the exporting benefits of a relatively low euro. But the real driver of job creation and investment has been multinationals.

The warnings from Mr Mody should not come as a surprise to anyone. What is more troubling is how predictable they are and yet the country does not seem to be full prepared to meet future risks head on.

The primary reason for this is the lack of fundamental reform in how we have run things over the last few years. Yes, undoubtedly some lessons have been learned but the advice from people like Mr Mody should be obvious. He maintains we need to invest heavily in education and innovation.

So, how does our reform scorecard shape up?

Education: Back in 2007, when we believed we were economically invincible, our education spending was still towards the bottom of the class. Less well-off nations back then were still investing a bigger slice of their revenues in their schools than Ireland. Last September an OECD report said that Ireland spends just 1.1pc of GDP on third-level education, below the OECD average of 1.6pc. Annual expenditure per student is lower than the OECD average for pre-primary and primary education.

We have huge numbers of students in third level, but reports on how to fund these institutions into the future remain in political cold storage.

Health: Health spending has increased but reform of how the system is managed and administered has been minimal. We still have a structure for running the service that mirrors the one we had before. Cost overruns are still happening despite our supposed new-found discipline. No significant progress has been made on reforming the health insurance sector, or fixing waiting lists. Instead we have spent lots of money providing free GP care for children whose parents, in many cases, can afford to pay.

Pensions: We have made no real progress in introducing reforms to handle the pensions time bomb. Tax breaks remain in place, but there is no auto-enrolment. The OECD said last year that Ireland and New Zealand are the only OECD countries with no mandatory, second-tier pension provision.

The fund aimed at financing future public sector pensions has been dismantled.

Housing: The housing crisis continues. We should have seen this coming and should have been better placed to deal with it.

No major reforms of the market have occurred vis-a-vis ensuring greater availability of land, workable rent controls and new social housing. The economic value of having an affordable place to live, never mind the obvious social value of it, has not been grasped.

A Mercer survey of the most expensive cities to live saw Dublin rise 34 places in the global rankings from 66th to 32nd. Noel O’Connor, senior consultant with Mercer said: “The survey identifies cost pressures on expatriate rental accommodation in Dublin as the key driver of this”, he said, combined with the high levels of FDI.

Banks: We now have banks that are seen as more conservative in their lending policies, but only because the Central Bank is forcing them to be. The tracker mortgage scandal showed how the culture of banking hasn’t changed at all. We do have executive salary caps on some of the bailed out banks, but we have less competition in the sector. It would be better to have the best international bankers running banking operations that had more competition.

Regulation: The Central Bank is now a behemoth. It is enormous and is likely to get even bigger. The culture of the organisation seems to have improved when it comes to lending caps and enforcement for certain offences. However, it was slow to adapt to the unfolding tracker mortgage scandal which raises questions about its commitment to challenging banks on consumer-related issues.

It is heavily focused on financial stability, which is no bad thing, but sometimes that can conflict with protecting the consumer – as in the case of the trackers.

Politicians: Our political culture has changed very little. Some of them will heap enormous pressure on government to increase spending in the run-up to the next budget, without pushing for the reforms that should be used to pay for it.

Ireland has been lucky since the economic crash. We cannot ride our luck indefinitely. The country has wasted the opportunity to fundamentally appraise how things are done across a large spectrum of issues.

Hopefully we won’t regret it.

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